Investor Reactions To Recent Market Turbulence

4/21/20 8:00 AM

By many measures, the volatility seen in the stock market recently is about as extreme as it has ever been, e.g. the decline from the highs into bear market territory was the fastest on record. Although it can understandably be difficult for regular investors to remain calm during such market tumult, a handful of encouraging surveys suggest that this is exactly what many Americans were able to do. For example, 66 percent of respondents in a new Bankrate poll said that they “intentionally did nothing with their stock or stock-related investments such as mutual funds” while markets plunged in March, and 13 percent even reported that they put more money to work in equities. The latter exceeds the 11 percent of respondents who said they liquidated some of their investments during last month’s market turbulence, and therefore suggests that more Americans might have capitalized on the selloff than panicked at the lows.

Similarly, a majority of investors in a new Gallup survey said that they view the recent volatile trading environment as “a time to hold the stocks you have and wait for the market to come back,” and around a third see this as “an opportunity to purchase more stocks while prices are down.” Although investors appear overwhelmingly confident that equity valuations will eventually fully recover, respondents are much more divided on exactly how long this rebound could take, i.e. roughly half think the bounce back to all-time highs will be quick, and half expect a lengthy recovery plagued with continued volatility and numerous false bottoms. Fortunately, many 401(k) investors can benefit from either scenario because rather than trying to time the market, these individuals are instead focused on the long-term objective of preparing for retirement through many years of routine, tax-advantaged plan contributions. A recent J.P. Morgan analysis in the same vein emphasized that “Even if it takes 5 years to recover to the market peak, the average annual return over that period would be 7%. If the market recovers faster, say in 3 years, that implies a 10% average annual return. These are still very impressive returns, especially when compared to expectations for fixed income returns in this 0% interest rate environment.”

Another important finding in the Gallup poll is that around nine in ten surveyed investors said they are “somewhat or very” confident they can “weather the current stock market downturn based on their existing asset allocation or financial plan.” This highlights the importance of regularly reviewing your investments to make sure that your positioning is properly aligned with your risk tolerance, nearness to retirement, and other unique variables. Because such portfolio maintenance can be complicated, many investors often turn to professional financial advisers for additional help. Moreover, an earlier Gallup poll found that 39 percent of investors that regularly work with an advisor said that they feel prepared for a market correction, while less than a quarter of respondents that do not consult with a financial professional were able to report the same level of confidence. Surveyed investors that work with an advisor were also more likely than respondents lacking outside guidance to say that they have a diversified portfolio (86 percent vs. 63 percent), believe their investment plan is on the right track (61 percent vs. 41 percent), rebalance their portfolio at least once a year (54 percent vs. 33 percent), and have a written financial plan in place (68 percent vs. 28 percent).